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COVID-19 and Africa’s debt predicament | Business Financial Times Online

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As the COVID-19 pandemic takes a toll on African health systems and their economies, African governments are staking a claim for debt relief or outright cancellation of debts owed to China and the west.

Ghana’s Finance Minister, Ken Ofori-Atta, and the South African Finance Minister, Tito Mboweni, have been leading the call for debt cancellation or debt relief. Several historic questions come to mind when Africa’s debts are discussed.  Are African governments justified in demanding debt relief and cancellation?   What are the alternatives to borrowing? What is the way out?

Mr. Paul Kagame (the proverbial lone voice speaking in the wilderness) has been advocating for an alternative to the African debt situation.

In a recent social media post, he wrote: “I would rather argue that we need to mobilise the right mindsets, rather than funding. After all, in Africa we have everything we need in real terms. Whatever is lacking, we have the means to acquire; and yet we remain mentally married to the idea that nothing can get moving without external finance. We are even begging for things we already have. That is absolutely a failure of mindset,” Kagame argues.

In his view, African countries should begin printing money to finance development and industrialisation – rather than borrowing from the west with their high interest rates.

Money supply

Proponents of printing more for development believe that if more money is printed, consumers are able to demand more goods. Other views show that printing currency increases the money supply, which causes inflation and reduces the people’s purchasing power. The reason for this is because a rise in demand that exceeds supply causes higher prices for everything.

Other economists argue that if a government prints money faster than the growth of real output, it reduces the value of money – and this invariably causes inflation. Simply put, printing money will just cause inflation.

The repercussions of printing money notwithstanding, governments all over the world have printed money for specific interventions and will continue to print money for the foreseeable future. Some analysts think that printing money for development and industrialisation is justified, given that the burdens of debt and interest payments continue to shackle Africa’s weak and import-based economies.

In the immediate past, interest payment on some of Ghana’s debts were estimated to be more than the overall development budget of the country.  Several studies have proved this the same trend for many African economies.

Debt-related distress

A recent analysis by the World Bank and IMF found that in 2019, 43 low-income countries were either experiencing or at a high risk of experiencing debt-related distress (a little over double the number in 2013). Debt distress is when a country has experienced difficulties in servicing its debt or is extremely close to doing so.

Practically, this means a government that has missed a repayment or is in the process of debt restructuring. Those at high risk are generally countries where the external debt burden is large enough to cause concern, but who have so far avoided any formal distress.

That can mean falling into crisis if there are large capital outflows, currency devaluations, or a drop in export earnings – all of which are likely for low-income countries in 2020.

As things stand now, the impact of COVID-19 will reverberate throughout the global economy for the foreseeable future. Prior to this emergency, multilateral organisations were already warning that debt sustainability in low-income countries was deteriorating.

This, perhaps, compelled the World Bank and IMF to call on bilateral creditors to support debt relief. This has become necessary, as low-income countries like Ghana are facing debt crisis while simultaneously facing an urgent need to support public health needs.

Undoubtedly, the COVID-19 pandemic is a global challenge that requires international cooperation, collaboration and coordination.

Source of credit

The World Bank has called this latest period of global debt accumulation the ‘fourth wave’ – marked by a uniform increase in government debt over the past decade (World Bank, 2020). It is characterised by a higher share of government revenue being directed toward repayments; particularly for low-income countries, which have seen external debt servicing costs rise from 3.9% of government revenue in 2010 to 9.6% in 2018. As this share of revenue increases, governments are forced to either cut expenditure, for example in health or public investment, or borrow more in order to maintain the same level of public services.

 

 

(Data source: Jubilee Debt Campaign (2019), World Bank (2020)

 

One possible explanation for more expensive debt is the source of credit.  Current data indicate that there has been a shift from concessional borrowing from multilateral and Paris Club creditors (i.e. European countries, Japan, USA). Instead, more lending has come via non-concessional sources such as China, non-Paris Club members, external commercial lenders, and domestic markets (ODI, 2019). Since this is non-concessional it comes with higher interest rates, which increases debt servicing costs.

Low-income countries now owe a higher percentage of their debt to external sources, making them more vulnerable to external shocks; such as currency depreciation and capital outflows, as well as worsening economic distress in times of financial crises (World Bank, 2020). For example, the current African debt to China is more than US$145billion with over US$8billion of payments required this year.  Perhaps impacts from the COVID-19 pandemic justify African governments demand for US$100 billion in assistance, including support for a moratorium on all external debt and eventually some debt write-offs.

Economic growth

As the recent estimates suggest that economic growth in Africa is likely to drop from 3.2% to 1.8% in 2020, government revenue is also likely to decline; making the risk of debt distress even greater in the coming year (UNECA, 2020).  Countries such as Zambia, Sierra Leone, Ghana and Mozambique are heavily reliant on such commodities for export earnings, and are at the forefront of this.

Global finance

On the global scene, it is evident that finance is drying-up. Added to that is an increased  outflow of capital from developing economies, which is making finance more expensive. This has caused volatility in exchange rates and an appreciation of the US dollar, making it more expensive for countries to service their foreign currency debt obligations. The World Bank has estimated that with the shrinking international reserves and declining export earnings, developing countries will struggle to insulate themselves from these shocks (World Bank, 2020).

This calls for urgent international support for countries like Ghana likely to suffer economic setbacks. The IMF and World Bank have called on bilateral creditors to suspend debt payments for low-income countries, as a matter of urgency. The two institutions say debt cancellation is critical to providing immediate relief, ensuring stability in financial markets and making sure no low-income country is burdened by excessive debt overhang or future repayments.

This can be complemented by a scale-up of the Catastrophe Containment and Relief Trust (CCRT), which provided IMF debt relief during the Ebola crisis.  The G20, having pledged US$5trillion toward the global economy, must make specific commitments to how this will support low-income countries. As indicated earlier, Africa needs  US$100billion (5.6% of SSA GDP) of financing to address the crisis in sub-Saharan Africa. International actors must act, or risk economic and human catastrophe. They should not wait for the unexpected to happen. Africa is tired of being the face of global poverty.

Priority

The priority for a country like Ghana should be providing frontline health services and improving the public health delivery. Secondly, reducing the length and severity of any economic fallout will need to be sustainable, requiring that financial stability and liquidity is maintained. This means providing low-income countries with the financing they need. The World Bank and IMF have projected that government deficits will rise as expenditure and revenue move in opposite directions; but this should not force low-income countries into prolonged indebtedness or financial crises over time.

According to the Brooklyn Institute, Africa needs an initial US$100billion in financial support because sharp declines in commodity prices, trade, and tourism – a direct result of the pandemic -are causing government revenues to dry up fast. Also, investor pullback from risky assets has pushed up the cost of borrowing in financial markets, limiting viable options for resource mobilisation.

Expectedly, the average fiscal support package announced by African governments so far amounts to a meagre 0.8% of GDP – one-tenth the level in advanced economies. And beyond the near-term, the continent’s additional financing needs could rise to US$200billion. Fortunately, international and other regional institutions are stepping up to complement national efforts. The African Development Bank recently issued a US$3billion ‘Fight COVID-19’ social bond, while the African Export-Import Bank has set up a US$3billion credit facility.

These efforts notwithstanding, global action and support for Africa to date have not gone far enough, says the Institute. “Because time is of the essence, we call for a two-year standstill on all external debt repayments, both interest and principal. During this standstill, the G-20 should task the IMF and World Bank with undertaking a comprehensive debt sustainability assessment and considering further debt restructuring, where appropriate, to preserve or restore debt sustainability.”

In a recent interview in South Africa, Mr. Ofori-Atta – who now chairs the Development Committee, a ministerial-level forum that advises the World Bank and the IMF on development issues, challenged   China to do more to help ease the debt burden of African countries facing economic calamity from the coronavirus pandemic. Perhaps, in the absence of debt relief or cancellation, African governments may be justified in printing money to finance development and industrialisation, Mr. Paul Kagame is advocating.

References

Brooklyn Institute (2020). Africa Needs debt relief.

Jubilee Debt Campaign (2019). Crisis deepens as global South debt payments increase by 85%.

Overseas Development Institute (2019). Low-income country debt: three key trends.

UNECA (2020). Economic impact of the COVID-19 on Africa

 

World Bank (2019). Debt sustainability.

 

World Bank (2020). Global Waves of Debt: Causes and Consequences.

(***The writer is a Communications and Development Management Specialist, and a Social Justice Advocate.  All views expressed in this article are my personal views and do not represent those of any organisation. (Email: safoamos@gmail.com. Mobile: 0202642504 0243327586.



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